When investing in a privately-held company, or a fund that invests in privately-held companies, it is desirable to determine the current value of the company or companies within the fund. Valuations are currently provided by various financial professionals, but the process tends to be manual, time consuming, and the results vary widely as no standardized valuation methodology is adopted across the profession. For example, as a private company can have multiple investors, it is not uncommon for each investor to value the company differently, which creates ambiguity and hinders the investment decision making process.
Various techniques of valuing a private company involve a selection of publicly traded peer companies. Generally, the individual conducting the valuation uses a manual method of determining the peers. The method can be based on the individual's expertise with the industry, use of industry classification schemas, or searching in a financial information product or the Internet using general terms. Unfortunately, these methods tend to lead to inconsistent results. The inconsistent results can be caused by individuals not having complete information on actual peer comparison, using industry classifications that identify peer companies that aren't truly comparable, or individual decision making being biased by selecting companies that have higher or lower valuation multiples, intentionally or unintentionally.
Several techniques of valuing private companies include the use of merger or acquisition (M&A) data of comparable companies. While these techniques can be relevant in determining valuations when a company is being acquired, these techniques can provide inaccurate results for the current valuation of a company. The reason for the potential inaccuracy relates to the timing of the M&A information. In particular, the M&A information used in the analysis may occur over many different economic cycles, and these cycles may not be representative of the current cycle. As the purpose of a valuation is to derive the value of the company as if it were to trade today, use of merger and acquisition data can mislead current investors.
Another common method for valuing private companies is to calculate the current value of the projected future cash flows. This is a reliable method for companies where it is possible to accurately predict the future revenue growth and operating margins of a company out five to ten years. However, for many privately-held companies, the accuracy of these projections can be very low and produce misleading results. The projections also suffer from the manual process of intentional or unintentional bias.
Accordingly, there is a need for improved systems and techniques for valuing privately-held companies.